ComfortDelGro - RHB Invest 2018-08-13: Taxi Business Risks Now Lower

ComfortDelGro - Taxi Business Risks Now Lower

ComfortDelGro offers a healthy 4.6% dividend yield and has well-priced in organic growth in its public transport and taxi businesses, as well as the upside from multiple bite-sized acquisitions.

With no fresh details on its private-hire car business plans in Singapore, its taxi business remains at risk from likely increased competition from Grab as well as the arrival of new players in Singapore.

1H2018 results below expectations.

ComfortDelGro’s 1H2018 profit of SGD141m accounted for 43%/45% of our and consensus estimates. Higher maintenance costs and higher fuel expenses were the key reasons for the earnings miss.

While most of fuel cost increase is indexed, i.e. ComfortDelGro will get compensated for it eventually, managing a fleet of older buses in Singapore and an aging North East MRT line, implies maintenance costs will remain high in the near term.

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Acquisitions supported revenue growth.

The SGD48m y-o-y increase in revenue was aided by a SGD66.1m increase in public transport and SGD20.4m from acquisitions made in Australia and Singapore. This more than offset the SGD31.6m decline in taxi and SGD10.7m drop in engineering businesses.

While revenue contribution from acquisitions was significant, their contribution to EBIT was smaller. This should improve as ComfortDelGro works towards better integration of the acquired assets to its business operations.

Public transport the key growth driver.

In 2Q, ComfortDelGro’s public transport business booked y-o-y and q-o-q growth in revenue and EBIT. Margins expanded, as well. This was due to a better-than-expected performance from its public bus contracts in Singapore and contributions from bus assets acquired in Australia and Singapore.

Public transport business will continue to drive growth for ComfortDelGro, with the commencement of the new Bukit Merah bus contract in 4Q18 and contributions from its acquisition of FCL, a bus business in New South Wales, Australia. This is despite continuing losses being reported by its Singapore rail business, which ComfortDelGro now expects to break even only by 2Q19 or 3Q19.

Looking to grow taxi fleet.

The decline in ComfortDelGro’s taxi fleet in Singapore was arrested, as 12,750 taxis in the fleet as at end 2Q18 was unchanged q-o-q. The taxi utilisation level was unchanged q-o-q, at 2%. Taxi margins improved y-o-y as ComfortDelGro disposed idle taxis. Although some part of q-o-q margin improvement was attributed to Singapore, it also included a one-off contribution from China.

ComfortDelGro has ordered 1200 new taxis in Singapore, of which 200 will be delivered in Aug 18 and the rest in 2019. A sizeable portion of these new taxis will be used to replace old taxis as ComfortDelGro estimates net fleet addition of only 300-400. ComfortDelGro expects new taxis to improve rentals, given that hybrid taxis cost higher than the diesel taxis that are planned to be phased out.

Maintain NEUTRAL.

ComfortDelGro’s taxi business, which has seen some improvement and accounts for c.30% of its EBIT, remains at risk if competition from private hire car business intensifies.

At 15.3x forward P/E, the stock is trading close to its 5-year average forward P/E of 16.3x.

The increase in Target Price was due to a mark-to-market adjustment in the risk-free rate for our DCF-based valuation.

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